SIIG-Petrochem potential merger to have ‘minimal’ impact on variable operating costs, says analyst

The potential merger between Saudi Industrial Investment Group (SIIG) and the National Petrochemical Company (Petrochem) is expected to have a minimal impact in the medium term, Jassim Al-Jubran, senior analyst at AlJazira Capital told Argaam.

The potential merger will likely cut variable operating costs, reduce marketing expenses and bolster the new merged entity’s financial position, Al-Jubran added.

“The merger between both companies will significantly diversify the merged entity’s product portfolio,” said Al-Jubran, indicating that SIIG’s joint venture with Jubail Chevron Phillips Co. (JCP) and Chevron Phillips Chemical Co. introduces different products from Petrochem. It could further eliminate the impact on the new merged entity in case there are maintenance works, and decrease the profit volatility.

The new entity will also reduce debt-to-equity ratio. Additionally, the merger deal will bolster the financial position of the merged entity and allow it to expand going forward in case there is sufficient feedstock supply.

Al-Jubran explained that any current plans for expansions in Petrochem will be inappropriate, unless the company reduces its leverage and provides sufficient liquidity.

Al Jubran ruled out future mergers in the petrochemical sector, adding that companies have recently resorted to mergers to cut costs amid market and economic pressures.

SIIG and Petrochem boards approved on Sept. 17 to start initial talks on studying the feasibility of a potential merger, data compiled by Argaam showed.

Petrochem, capitalized at SAR 4.8 billion, produces chemicals such as ethylene, polyethylene, hexene, propylene, polypropylene, and polystyrene. The company currently operates only through its 65%-owned subsidiary, Saudi Polymers Co.

Capitalized at SAR 4.5 billion, SIIG produces benzene and styrene via its joint ventures with Chevron Philips.